Toll Brothers, Inc.

Good morning and welcome to the Toole Brothers Second Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw your question, please press star, then two. The company is planning to end the call at 9.30 when the market opens. During the Q&A, please limit yourself to one question and one follow-up. Please note this event is being recorded. I'd now like to turn the conference over to Douglas Yearley, CEO. Please go ahead.

Thank you, Jason. Good morning. Welcome and thank you for joining us. With me today are Marty Conner, Chief Financial Officer, Rob Parrahouse, President and Chief Operating Officer, Fred Cooper, Senior VP of Finance and Investor Relations, Wendy Marlette, Chief Marketing Officer, and Greg Ziegler, Senior VP and Treasurer. Before I begin, I ask you to read the statement on forward-looking information in our earnings release of last night and on our website. I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets, interest rates, the impact of the pandemic, the availability of labor and materials, inflation, and many other factors beyond our control that could significantly affect future results. We are very pleased with our second quarter performance as we met or exceeded our guidance on all key metrics. We delivered a record 2,407 homes in the second quarter at an average price of approximately $908,000, resulting in record home sales revenue of $2.2 billion. This was an increase of 19% compared to last year's second quarter revenue. Our teams did a great job delivering homes in what continues to be a very challenging production environment. Adjusted gross margin of 26.1% in the quarter improved 170 basis points compared to last year's second quarter and was 60 basis points better than guidance. SG&A expense at 11.1% of home building revenues was 80 basis points better than both last year's second quarter and our guidance. Driven by significant revenue growth and expanding margins, we generated earnings per share of $1.85 of 83% compared to last year. At second quarter end, our backlog stood at a record $11.7 billion and 11,768 homes. Based on the strong pricing and margin embedded in our backlog, and with approximately half of our backlog scheduled for delivery in fiscal year 2023, we expect our fiscal year 2023 adjusted gross margin to be better than fiscal year 2022. Sales in our second quarter were our highest quarter ever, as demand remains strong across all of our buyer segments and geographies. We signed 2,874 net contracts for $3.1 billion, up 1.2% in dollars over 2021's extremely strong second quarter, when orders were up 97% in dollars compared to Q2 of 2020. Our quarterly sales pace was consistent with the 8.8 contracts per community that we projected for Q2 on our earnings call back in February. While demand is still solid, over the past month it has moderated from the unprecedented pace of the past two years as buyers adapt to higher mortgage rates and other macroeconomic conditions. The substantial rise in home prices, the steep increase in mortgage rates since January, inflation concerns, and stock market volatility are all having an impact on buyer sentiment. And we anticipate that some buyers may remain cautious through the seasonally slower summer months. As a reminder, in the second quarter, we limited sales to catch up on construction. We are continuing this strategy in the third quarter. With the combination of restricting sales, the normal summer slowdown, and a more cautious buyer, we expect our Q3 contracts to be lower than Q2, which is what normally occurred pre-COVID. Despite the recent moderation, the housing market remains healthy. Even over the past month, we have continued to raise prices in a limited number of communities, and we are running successful best and final sealed bid processes in about 15% of our communities. The many fundamental drivers that have supported the housing market in recent years remain firmly in place. These include favorable demographics with 150 million millennials and baby boomers experiencing life events that are driving home demand. The supply and demand imbalance resulting from over a decade of underproduction, tight resale inventories, migration trends driven by more flexibility in the workplace, and an overall greater appreciation for homes, and in particular, new homes. In addition, the for sale housing market is benefiting from an ongoing and significant increases in rents for single and multi-family dwellings. We believe these trends will continue to support housing demand in the long term. Turning specifically to our customers, we believe they are generally better insulated from affordability concerns. They tend to have higher incomes and net worth, and many have benefited from significant price appreciation in their existing homes. Approximately 20% of our customers pay all cash, and those who do take a mortgage average approximately 70% loan to value. Importantly, our buyers utilizing jumbo loans are benefiting from a rate that remains three-quarters of a point lower than the conforming rate. As our industry continues to be challenged by supply chain disruptions, labor shortages, and municipal delays, we have revised our full-year deliveries guidance. We now expect full-year deliveries to be between 11,000 and 11,500 homes a reduction of about 375 homes at the midpoint. However, we have increased our average delivered price guidance by $15,000 per home to reflect the strong pricing in our backlog. As a result, we expect full-year 2022 home building revenues of approximately $10.1 billion at the midpoint of our guidance, with 20% growth compared to fiscal year 2021. We remain committed to our disciplined and capital-efficient land acquisition strategy. At the end of our fiscal second quarter, we under-controlled 85,800 lots, of which 53% were controlled and 47% were owned. Nearly 12,000 of these lots are already committed to homebuyers in our backlog. Excluding these, our controlled land represents 61% of lots. This land position, much of which was contracted for pre-pandemic, provides us with sufficient land needed for significant growth well into the future. Therefore, we can be very selective as we evaluate new land deals and apply our more rigorous underwriting standards that incorporate higher gross margin and IRR thresholds, higher contingencies for land development and construction costs, and more conservative assumptions related to sales paces. We also remain focused on improving our return on equity. In the second quarter, we repurchased $106.5 million of our common stock and another $16 million so far in our third quarter. Since the beginning of the fiscal year, we have repurchased about $308 million, or 4.6% of our year-end share cap. We have also paid $44 million in dividends year-to-date, and we retired $410 million of long-term debt in our first quarter. In March, our board approved an 18% increase in our quarterly dividend, and just last week, refreshed our share repurchase authorization to 20 million shares, or nearly $900 million based on current prices. These actions reflect our confidence in the business and our commitment to delivering returns to our shareholders. With that, I'll turn it over to Martin.

Thanks, Doug. In our second quarter, we delivered 2,407 homes and generated home building revenues of $2.2 billion, up 6% in units and 19% in dollars from one year ago. The average selling price of our 2,874 signed contracts in fiscal year 2022 second quarter was $1,075,000. up nearly $200,000 compared to last year's second quarter, and up $53,000 over Q1. Our second quarter pre-tax income was $296 million compared to $170 million in the second quarter of fiscal 2021. Net income was $221 million, or $1.85 per share diluted, compared to $128 million and $1.01 per share diluted one year ago. Our second quarter adjusted gross margin was 26.1% compared to 24.4% in the second quarter of 2021, and 60 basis points better than we had projected. The improvement was due primarily to price, reflecting the strong demand environment over the last year. We continue to project an adjusted gross margin of approximately 27.5% for the full year. We expect the adjusted gross margin for our third quarter of fiscal year 2022 to be 27%, which implies an adjusted gross margin in excess of 29% in our fourth quarter. As Doug mentioned, we believe our fiscal year 2023 adjusted gross margin will be even better than this year's. This is due primarily to the composition of our backlog and the pricing power we've experienced over the past year. Approximately half of our existing backlog of 11,768 homes are projected to be delivered in fiscal year 2023. And this backlog is solid. Our cancellation rates have consistently been the lowest in the industry for many decades, which speaks to the financial strength of our customers and our build-to-order model, which allows our buyers to personalize their homes, becoming emotionally invested in those homes. They are also financially invested as they make a non-refundable deposit averaging $75,000, plus they benefit any home price appreciation between contract signing and ultimate delivery, which has been significant. As a result, we had just 114 cancellations in our backlog of over 11,000 homes in the second quarter, or about 1%. We haven't seen any significant changes in May. Let me quickly address any concerns that rising mortgage rates may have on future cancellation rates. First of all, keep in mind that 20% of our buyers pay all cash. Fluctuations in interest rates should have no impact on these buyers. We've also pressure tested the balance of our backlog. We estimate that if the 30-year conforming rate were to increase to 6%, less than 10% of our backlog would have to consider an arm, provide a higher down payment for additional source of income, or consider other alternatives such as buying down rates with upfront points. As our low cancellation rates in the second quarter attest, our buyers have remained committed to their new homes even with the rapid increase in interest rates. And remember, The homes in our older backlog, which were contracted for when rates were lower, have enjoyed significant price appreciation, which means these buyers have greater motivation to close, and we have less risk if they don't. Turning back to our results, SG&A as a percentage of revenue was 11.1% in the second quarter, compared to 11.9% in Q2 of last year, and this was 80 basis points better than we projected. The improvement was driven primarily by revenue growth and lower sales and marketing spend. Second quarter joint venture, land sales, and other income was $12 million, exceeding our guidance of $5 million, due primarily to a gain from the bulk sale of home security monitoring accounts. Impairments and write-offs were $2.2 million in the quarter, reflecting sunk costs on land deals that we are no longer pursuing. Our tax rate in the quarter was 25.4%. We finished the quarter with a net debt-to-capital ratio of 33.1%, with $535 million in cash and equivalents, and with $1.8 billion available under our $1.9 billion revolving bank credit facility. This all provides us with ample flexibility to both grow and return capital to our shareholders. At quarter end, our book value per share was $46.51. Based on the midpoint of our guidance and supported by our solid backlog we expect this to be approximately $53 per share at fiscal year end. Turning to guidance, we are projecting fiscal year 2022 third quarter deliveries of 2,750 homes with an average price between $895,000 and $915,000. As Doug mentioned, continued supply chain and labor constraints and municipal delays are impacting production. As a result, we have reduced our full-year delivery guidance by approximately 375 homes to between $11,000 and $11,500. But based on the pricing and our backlog, we have increased our projected average delivery price to between $890,000 and $910,000, a $15,000 increase. prior guidance. We expect interest and cost of sales to be approximately 2% in the third quarter and for the full year as we continue to benefit from our reduced leverage. We project third quarter SG&A as a percentage of home sales revenues to be approximately 10.5%. For the full year, we project SG&A as a percentage of home sales revenues be approximately 10.4%, a modest 10 basis point improvement from our prior guidance. We expect community count to be approximately 325 at the end of the third quarter and 370 by fiscal year-end. We've lowered our full-year community count projection slightly due to municipal delays and supply chain disruptions impacting land development. Other income, income from unconsolidated entities and land sales gross profit is expected to be break-even for the third quarter, but is now expected to be approximately $110 million for the full year, an increase of $10 million over our prior guidance. Our guidance for the fourth quarter is therefore $68 million, primarily from the sale of certain apartment living assets. we project a tax rate of approximately 26% for the third quarter and 25.7% for the year. Our weighted average share count is expected to be 119 million shares for the full year and 117.5 million for the third quarter. Based on all these factors, we continue to project approximately $10 per share in full-year earnings per share and a return on beginning equity of approximately 23%. Now, Doug, back to you.